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Coronavirus – a fund manager's view

Healthcare investing expert Geoffrey Hsu of OrbiMed Advisors shares his thoughts on the virus outbreak.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Following on from our last update on how investors could react to current volatility, we recently spoke to Geoffrey Hsu of OrbiMed Advisors, which manages the Worldwide Healthcare Trust. We got his views on the coronavirus outbreak and what it might mean for investors. Hargreaves Lansdown may not share these views.

This article is not personal advice. If you’re not sure if an investment is right for you, please seek advice. As thematic investments usually focus on one area, they should be thought of as higher-risk and should only ever make up a small part of a diversified portfolio.

The knowns and unknowns

Geoffrey Hsu told us “While the situation with regards to COVID-19 remains fluid, we believe that ultimately, the situation will play out similarly to other virus outbreaks in the past (e.g. SARS, MERS, etc.). There may be a transient impact on stocks and economic activity, which we are observing now, but markets will recover once the outbreak is under control. Our expectation is that the coronavirus will continue to spread through community transmission and more countries around the world will report confirmed cases.

However, it appears that there is significant under-diagnosis of coronavirus infection, given that many individuals infected have mild or no symptoms, so we believe that the current estimated mortality rate of 2-4% is likely to decline substantially as more patients are diagnosed. While there is clearly a lot of panic in the markets right now about the virus, we believe several events can transpire over the near term that could allay investor fears, including:

  1. a continued decline in the estimated mortality rate with increased diagnosis,
  2. the advent of an effective treatment or vaccine over the next several months, or
  3. the arrival of warm weather, which could curtail spread of the virus significantly. We would note that the number of new cases already appears to be declining in China, the epicentre of this latest virus outbreak.”

What the professionals are doing

“With regards to investment strategy, we have not made any investments specifically designed to capitalize on the development of a treatment or vaccine for coronavirus. Some of our portfolio companies happen to be developing coronavirus treatments and vaccines but those activities are ancillary to our primary investment theses in those names.

It is extremely difficult to estimate the ultimate revenue potential for those products and historical precedent suggests that companies are generally unable to generate long-term sustainable revenue from effective treatments or vaccines for a virus outbreak. Much will depend on whether or not COVID-19 emerges as a seasonal phenomenon that recurs year after year, or whether it is a one-time phenomenon – this remains an open question.

We have therefore not “chased” stocks in the coronavirus space whose share prices have been driven up by retail buying, as history suggests many of those moves will prove to be short-lived. Instead, we are capitalizing on the market volatility to opportunistically adjust positions in stocks that we feel may be mispriced in the current environment. Ultimately, our view on coronavirus is that “this too shall pass” and stocks will eventually return to trading on fundamentals rather than on macro fears related to the virus.”

What next?

One thing we can be sure of is that news will keep hitting the headlines. What we can’t predict is the end point for the virus – we simply don’t know what the full impact will look like.

As investors we hate uncertainty. But extending beyond that, we also recognise the human impact the outbreak is having. We’d all prefer this ends sooner rather than later.

We’re likely to see more volatility to come, at least in the short term. As always, we’ll keep you up to date with developments. Sign up below if you’d like our top picks sent straight to your inbox.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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